Last week, Lloyds Banking Group (LSE:LLOY) released its 2022 annual report. Even though the business issues quarterly updates, there’s still plenty of new information to digest from the annual statement.
Lloyds shares initially fell when it was released, but managed to rally by the end of the day. This shows investors were mixed on the report’s content. Here are my main takeaways and what I think it means for the stock going forward.
Proud to lend, but care needed
In the opening few pages, the business splashed out some headline numbers to shout about the good stuff. One was that it had “lent circa £35bn to businesses and proactively offered support”.
Lending is a key way the bank makes money. It takes the base rate from the Bank of England, adds on a margin and then gives businesses loans. When the money is repaid, it profits from the interest margin.
Pushing loans is an important way Lloyds can outperform this year. Given the state of the UK economy, it’s a product that will be very helpful to individuals and corporates.
However, my second takeaway is that it has to be careful with this lending facility. Having set aside £1.5bn of provisions for loans going sour, this could spiral higher if people or companies cannot afford to pay them back.
If losses mount, it acts as a major detractor to bottom line profits and hurt Lloyds shares.
Dividends continue to grow
For income investors, a key bit of news was the confirmation of a final dividend of 1.6p per share. This takes the total paid for the year to 2.4p, a rise of 20% versus the previous year.
The current dividend yield is 4.65%, above the FTSE 100 average of 3.58%. It’s clear to me that Lloyds is pushing to keep the pay-out high to attract investors. This is logical, as the company is mature and unlikely to have massive growth in coming years. Therefore, paying out profits to shareholders via a dividend is important to retain interest.
A fourth point I’ve taken from the report is that the dividend policy will continue to be “progressive and sustainable”. Given that the outlook presented for the next few years (2024-2026) is one of growth, I’d expect the dividend to increase.
Tough to justify buying right now
My final point is focused on the rest of 2023. The report said “a mild recession and falling property prices are expected to reduce growth in most of our markets in 2023”.
For Lloyds shares, I don’t see this as a great reason to buy right now. I feel the outlook for the long-term is strong, with opportunities for share price growth and dividend income. Yet for the weeks and months to come, I think growth will be hard in the current environment.
Therefore, I get the mixed reaction of the share price following the report. I won’t be investing right now and will use any dip in the stock to reconsider my viewpoint.
